Rentvesting has become an increasingly popular strategy for Australians who want to get on the property ladder while maintaining their preferred lifestyle. This approach involves buying a property as an investment while continuing to rent in a location that suits your work, lifestyle, or family needs. For rentvesters, understanding the 6-year Capital Gains Tax (CGT) rule is crucial.
What is the 6-Year CGT Rule?
The 6-year CGT rule allows property owners to treat their property as their primary residence for CGT purposes, even if they are not living in it, provided certain conditions are met. This means that rentvesters can rent out their property without paying CGT on the capital gain if they sell the property within six years of moving out.
The rule applies under the following conditions:
- The property must have been your primary place of residence (PPOR).
- You must not treat another property as your PPOR during the same period.
- If the property is not sold within six years, CGT may apply to the portion of the ownership period beyond six years.
Why is the 6-Year CGT Rule Important for Rentvesters?
For rentvesters, the 6-year rule offers a significant tax advantage. It allows you to rent out your property while maintaining the tax benefits associated with owning your PPOR. This can be particularly beneficial if you anticipate the property’s value appreciating substantially over time.
Benefits of the 6-Year CGT Rule for Rentvesters
1. Tax-Free Capital Gains
By taking advantage of the 6-year rule, rentvesters can potentially sell their property within six years of moving out without incurring CGT. This can result in substantial savings, especially in high-growth areas.
2. Flexibility in Living Arrangements
Rentvesting allows you to maintain lifestyle flexibility while still building equity in a property. The 6-year rule ensures that this flexibility doesn’t come with the cost of CGT.
3. Time to Reassess
The six-year window gives you time to decide whether to retain the property, sell it, or move back in to reset the CGT exemption clock.
Key Considerations for Rentvesters
1. Resetting the 6-Year Rule
If you move back into the property, the 6-year rule resets. This means you can live in the property again and potentially restart another six-year exemption period if you later decide to rent it out again.
2. Partial Exemptions
If you rent out the property for more than six years, you may be liable for CGT on the portion of the ownership period exceeding the exemption. The calculation is based on the number of days the property was rented out versus the total ownership period.
3. Other PPOR Rules
You can only have one property classified as your PPOR at any time. If you purchase another property and move into it, the 6-year CGT exemption on the original property will no longer apply.
4. Market Timing
Deciding when to sell is critical. Selling within the 6-year window ensures maximum tax benefits, but this should be balanced against market conditions and your financial goals.
Case Study: How the 6-Year CGT Rule Works for a Rentvester:
Emily’s Scenario:
Emily buys a two-bedroom apartment in Sydney for $800,000 in 2025 and lives there for 6 months, making it her PPOR.
Emily then moves to Melbourne for work and decides to rent out her Sydney apartment for $750 per week while renting a home in Melbourne.
By 2029, the Sydney apartment’s value has risen to $1,000,000. Emily decides to sell the property within the 6-year CGT exemption window.
Outcome:
Emily qualifies for the 6-year CGT rule because the Sydney apartment was her PPOR before being rented out, and she hasn’t nominated another property as her PPOR.
She avoids paying CGT on the $200,000 capital gain, saving her potentially tens of thousands of dollars in tax.
If Emily had waited until 2032 to sell, she would likely have to pay CGT on the proportion of the gain corresponding to the time the property was rented out beyond the 6-year exemption period.
Disclaimer: This is general information only and is not advice. Liability limited by a scheme approved under professional standards legislation.